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Dollar is America's Achilles'
heel
Linda S. Heard
Online
Journal
Thursday November 22, 2007
Dump it or stay with it is a question being mulled
over by private investors, financial institutions, major corporations
and central banks around the world in relation to the weakened
US greenback.
On Sunday, it was the turn of the Organisation of Petroleum Exporting
Countries (OPEC).
Speaking at a press conference following the recent OPEC meet
in Riyadh, Iran's President Mahmoud Ahmadinejad said all member
states are concerned about the falling US currency and have asked
their finance ministers to study the feasibility of selling oil
in another currency.
However, OPEC's official communique omitted to mention any such
intention, probably due to Saudi Arabia's determination to not
rock an already capsizing boat. It's interesting to note, though,
that for the first time Saudi Arabia declined to cut interest
rates in concert with the last Federal Reserve decision.
(Article continues below)
It is certainly a dilemma for oil-producing nations. Sticking
to a currency in decline doesn't appear to make financial sense
on the surface, but were they to change, say, to euros there is
a good chance the dollar would collapse causing chaos in world
markets and a possible global recession.
The GCC must make similar decisions over the dollar peg with
the exception of Kuwait, which unilaterally made the switch earlier
this year and has since seen its currency revalued upwards by
4.5 per cent.
The peg has served GCC nations well for decades but is now triggering
inflation due to the high cost of imports. It is also distressing
the workforce, whose income in real terms is diminished. This
is especially worrying for expatriates with financial commitments
in their home countries, such as mortgages or a need to support
dependants.
Last week, the governor of the UAE Central Bank, Sultan Bin Nasser
Al Suwaidi, hinted that the Emirates may instead link the dirham
to a basket of currencies that would also include the dollar.
"It's not my prediction but everybody is expecting that the
US dollar will go down further. It will trigger a review,"
he said during a visit to South Korea.
Previously, Al Suwaidi has indicated the UAE would not move without
a consensus from its fellow GCC partners, but there is a general
impression that Saudi Arabia, Bahrain, Qatar and Oman are reluctant
to alter the status quo. Eventually the UAE will have to decide
whether to bite the bullet or go it alone.
Although the discussions conducted by Gulf countries over whether
to discard the petrodollar and delink GCC currencies from the
greenback are pragmatically focused on economics, this isn't the
case for all OPEC members.
Iran and Venezuela, for instance, view the dollar as a symbol
of American hegemony and are keen to do away with it for primarily
political reasons.
Vulnerability
The fact that such a debate is underway illustrates America's
vulnerability and at the same time the clout wielded by oil producers
should they choose to use it to influence US foreign policy.
For instance, the Arab world may not have a nuclear bomb but
it does have the wherewithal to bomb the American economy. In
this case, staying with the dollar ensures they always have a
bargaining chip when push comes to shove.
China is similarly placed due to its massive holdings of US Treasury
bonds, estimated at $800 billion. Irritated by US pressure to
revalue the Chinese yuan, earlier this month two Chinese officials
warned the US State Department that China possessed the "nuclear
option" to offload its US dollar denomination assets.
And even though most Western economists believe such a step would
similarly hurt China, even its mention set off a dollar slump.
Other countries planning to diversify their dollar holdings include
South Korea, Sudan, Venezuela, Japan and Russia, which has ambitions
to open an oil bourse trading in rubles. Italy, Switzerland and
Sweden have already made adjustments to their foreign exchange
reserves.
US influence is further being eroded in South America by Venezuelan-led
plans for a new bank -- Banco del Sur -- that would eliminate
the region's dependency on the World Bank and the International
Monetary Fund; institutions that the Venezuelan President Hugo
Chavez refers to as "tools of Washington".
The six other founder nations are Argentina, Bolivia, Brazil
Ecuador, Paraguay and Uruguay, which may soon be joined by Chile,
Colombia, Peru Guyana and Surinam.
If Latin American countries move out of their current holdings
of US Treasury bonds -- estimated at around $500 billion -- the
impact on the dollar could be enormous.
Billionaire investor Jim Rogers, chairman of Rogers Holdings
and a former partner of the man with the Midas touch, George Soros,
recently warned, "If you have dollars, I urge you to get
out. That's not a currency to own." He may be right.
There's a message here. The US may be the most militarily powerful
and technologically advanced country in the world but even a roaring
giant can be stopped in its tracks when he's hit where it hurts
the most in his pocketbook and especially when that pocketbook
is also his Achilles' heel.
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